S&P500 - The "peak inflation" rally?

Oct 13th 2022

On the back of poor inflation data, the S&P 500 rallied 5% from its day low. Does the market anticipate inflation to have peaked with yesterday’s core CPI reading? If yes, and positive earning surprises, could add legs to this rally for the next couple of weeks as we approach the next FOMC.

With the current inflation data, there is no case for a Fed pivot yet.

More than a “peak inflation rally,” this is more of a technical bounce. Considering the build up of pessimism in the markets going into inflation day, this could be a bear market rally to shake out the weak hands before continuing any further downside, towards the end of November.

Upside target: 3875 to 3950

If buying interest and this rally fizzles out sooner (particularly in the area 3750 to 3800), the index is likely to make new lows with a downside target of 2950 to 3000.

There is also a possibility that we may have seen the low point for the year yesterday. The chances of this is very low currently and will require the index to see strong buying interest over the next couple of months. A hawkish fed or escalation of the war in Ukraine can dampen the rally and bring in selling pressure.

Tactical strategy: if this rally continues towards the upside target, look to move to cash and / or hedge current positions.